MW: Dollar rallies vs. rivals as U.S. automakers get loans
Euro weakens further after ECB rate move; yen steady after Bank of Japan cut
NEW YORK (MarketWatch) -- The U.S. dollar rallied Friday against other most major currencies, particularly the euro, as the Bush administration said it will give loans to struggling automakers in a move to save them from bankruptcy.
The dollar index , which measures the U.S. unit against a trade-weighted basket of six major currencies, surged to 81.115, up from 79.670 in North American trading late Thursday.
The White House announced plans Friday to extend $13.4 billion in loans to troubled Detroit automakers, with another $4 billion likely available in February, citing the need to avoid "disorderly liquidation" during an already troubled economic period.
The deal could help General Motors Corp.and closely held Chrysler LLC avoid bankruptcy and is contingent on the companies showing they are financially viable by March. Read more on automaker plan.
On Thursday, the dollar began to recover from its sharp losses earlier this week that came in the wake of the Federal Reserve's decision to cut interest rates to historic lows.
"The U.S. dollar's sharp losses over the past week do not reflect the start of a new bear market," said currency strategists at Brown Brothers Harriman & Co. in a research note. "Short-term momentum trading is driving the current move in illiquid year-end markets."
Euro falls sharply
The euro fell to $1.3914, down from $1.4280 late Thursday. The British pound fell to $1.4900 from $1.5039 late Thursday.
The euro continued a move south that began in the previous session due to rate moves by the European Central Bank. The ECB cut its official deposit rate Thursday by 50 basis points to 1% below the key rate and raised its marginal lending rate by 50 basis points to 1% above the key rate. See full story.
Lowering the overnight deposit rate makes it less attractive for banks to park funds overnight with the ECB, and the rise in the lending rate will likewise make it more expensive for banks to borrow from the ECB.
Analysts said the move by the ECB was aimed at stemming a surge of overnight deposits following the U.S. Federal Reserve's decision earlier this week to cut its key lending rate to virtually zero.
The net effect was positive for currencies that have been hard hit by the euro in recent days, such as the British pound and U.S. dollar. The euro hit a record high of around 95 pence on Thursday, but was most recently trading at 92 pence, a more than 2% fall for the euro.
John Hardy, foreign exchange specialist for Saxo Bank, said it's uncertain whether the ECB move really will loosen up credit markets in Europe, considering the U.S. experience, where little lending is taking place despite a generous Fed.
"The European banking system may be more leveraged than its U.S. counterpart and while the U.S. has already aired an awful lot of its dirty laundry, it seems the European banks are behind the curve by that measure...and there will undoubtedly be more ugly revelations ahead," Hardy said in research notes on Friday.
"In any case, the ECB moves may put a stopper to the euro rally for the shortest term, especially versus the Japanese yen," Hardy said. The euro was last trading down 2.5% against the Japanese yen.
He said the battering the pound has taken against the euro has become "downright parabolic, a sign that it will soon exhaust itself.
However, he said it remains to be seen as to whether the euro rally has reached a climax. "There's a lot of wood to chop to the downside for sure before we would ever attempt to call a top, but the pound has clearly moved to undervalued levels vs. its mainland counterpart on a longer term basis."
Currency strategists at BNP Paribas said that the euro is vulnerable to a sharp move lower in 2009.